Diversified Healthcare Trust Q2 FY2025 earnings call

• Chris Bilotto provided a high-level review of DHC's solid second quarter results and update on strategic initiatives. - Anthony Paula detailed second quarter financials and CapEx spending, noting same property cash basis NOI increase and revising 2025 CapEx guidance. - Matt Brown discussed liquidity, financings, and debt management, including plans to address 2026 zero-coupon bond. - Strategic initiatives include asset sales, with $280 million of proceeds from dispositions under PSA or LOI, new financing activity expected in Q3, and reducing CapEx spending.

SHOP segment: Same-property shop NOI was $37.4 million, an 18.5% year-over-year increase. Average monthly rate increased 5.4% over year, occupancy increased 160 basis points to 80.6%, resulting in a 6.2% increase in SHOP revenue. Same-property cash basis NOI was $71.2 million, an 11.2% year-over-year increase. Medical Office and Life Science portfolio: Completed over 106,000 square feet of new and renewal leasing activity with weighted average rents 11.5% higher than prior rents for the same space at a weighted average lease term of 7 years. Same property occupancy was 89.8%, down 10 basis points from the first quarter. Active leasing pipeline of 691,000 square feet, with 246,000 square feet being new absorption.

• Reduced 2025 CapEx guidance to $140 million to $160 million, a $10 million reduction from prior guidance. - Increased 2025 SHOP NOI guidance at the midpoint to $132 million to $142 million. - Plan to use proceeds from dispositions, new financing activity, and strong liquidity position to address 2026 zero-coupon bond. - New $150 million secured revolving credit facility with maturity in June 2029 and extension options.

Q: Maybe digging in a little bit on the 2Q results, just given kind of the change to guidance and you're kind of calling out of some onetime items in the first half of the year. Anything notable specifically in 2Q '25? I know there were some, I believe, it was insurance reimbursements in 1Q, but just anything in 2Q that would be considered kind of onetime issue? Maybe how much could that impact the model going forward?

A: Yes, the majority of the NOI benefit came in the first quarter as we noted with those insurance proceeds. We had a little bit of benefit to Q2 [ PLGL ] insurance, but not as material to Q1. As we look forward, we expect to continue to see occupancy growth towards the year-end target that we previously highlighted. We do expect some seasonal increases in Q3 with utilities that happen every year. And then with a few more days in the second half, that will add some costs as it relates to salaries and benefits, et cetera.

Q: And then as I think about the CapEx guidance change, was that all tied to reductions in kind of SHOP CapEx? Or is there other kind of other parts of the portfolio where you're seeing less of a need for CapEx?

A: There's a few different pieces. So really, part of it is dispositions and just generally as we advance towards closer to year-end, just kind of comparing where we're at from an actual year-to-date spend of what we underwrote for budgeting. We're just trying to tighten our range a little bit. And then also we have some tenant managed [indiscernible] and [ speculative ] leasing in the MOB and Life Science portfolio that can fluctuate but we kind of feel good about I think that range to what we did earlier today in the prepared remarks.

Q: And then on the disposition front, specifically, is there anything maybe beyond the pipeline of sales that are under PSA and LOI that you think you could continue to close either by year-end or maybe heading into '26. Just kind of trying to balance out what was closed year-to-date, what was kind of in the pipeline as of the June presentation and what's kind of in the just under contract bucket per the kind of supplemental. I mean is that imply that maybe you're going to sell less stuff that was being marketed previously? Or is that still kind of in the works and maybe could close later this year?

A: Yes, it's a mix, right? We noted the $280 million, as you alluded to on the PSA and LOI front. Those are kind of the Q3, Q4 targets. We do have a handful of other assets, 4 different properties, 2 MOB, Life Science, 2 SHOP for another $20 million that is kind of behind with respect to the marketing process versus the LOI PSA. And so I don't -- I would look at that as late Q4 and even into Q1 as a guide. But that really rounds out kind of the active marketing that we're doing. We did sell the 3 post quarter end as I mentioned in our prepared remarks so things are trending accordingly. But yes, this will conclude kind of the broader stretch of asset dispositions and then we'll just kind of turn to more hand-to-hand combat or strategic capital recycling on an ongoing basis as we get into 2026.

Q: Not a huge differential, but it seemed a little bit like the 5 Star assets, at least on a kind of comparative basis maybe even a quarter-over-quarter comparative basis kind of outperformed some of the other SHOP properties in the portfolio. Anything to call out there as to why that was? And how does that, if at all, change your philosophy on how much of the portfolio you want to have being operated by Five Star?

A: Yes. I mean, look, I think that Five Star has been really kind of working towards improving its overall business model and kind of bringing kind of the right team members in place. And we've talked about some of the general improvements to the operating platform that they've instilled. We've invested capital in many of those Five-Star properties. And so we're starting to see the benefit of that as well. And I think kind of generally speaking, I would say net-net, some of the Five Star properties are located in more primary markets. So we're going to get some outside benefit from that. For the balance of the portfolio, there's still a lot of upside opportunity with there. I mean we talked about some of the onetime impacts. We saw a pullback in Q2 with our SNF properties. We have 10 of those with an operator and with some onetime adjustments. And so that is impairing some of the results for the quarter. But we would expect both to kind of trend favorably, but with a slight tilt towards a Five Star manage just given the properties, the renovations more specifically with that portfolio.

Q: And then last question for me. In terms of occupancy, as we think about where you are today versus kind of getting to the target range and guidance, is there some reason that, that could maybe kind of hockey stick up at the tail end of the year either a fulfillment of the CapEx plan, something around seasonality? Or should that kind of, in your mind, gradually build towards that guidance number?

A: It gradually builds over the year. I mean we provided kind of the year-end spot occupancy north of 82%, about 82.5% was kind of the midpoint we're targeting. And so that's going to be a byproduct of just improvement. I mean we're seeing some favorable results coming into July and again, as we get through these months kind of being more in favor with seasonality, we would expect that trend to continue. And then you're going to have the inflows and outflows of the dispositions that are currently under LOI or PSA that will also kind of fluctuate that occupancy number ultimately getting us to that guidance towards the end of the year.

Q: Just have a few clarification questions. I know you said there was nonrecurring benefit, mostly in 1Q, but there was a little in 2Q. What was the amount in 2Q that was nonrecurring? And where was that included in the P&L? Is that in SHOP NOI?

A: Yes, it's in SHOP NOI. It was on the expense side related to a benefit in PLGL insurance. It was about $1 million.

Q: Okay. Great. And then I know that the CapEx number has been coming down a little bit. What is the correct recurring CapEx per unit in your SHOP portfolio? So if you kind of fast forward into '26 and beyond, is all the extra CapEx dollars that you've been spending, is that done? And what is the right run rate per unit going forward?

A: So from a recurring SHOP standpoint, we're thinking about $3,500 per unit. And on the redevelopment side, we're trying to be strategic in terms of how we deploy capital there. But generally, we're thinking into high-teen returns on that CapEx.

Q: And then as you go into 2026, are we done with the extra maintenance CapEx that you've been kind of going through the past few years? Or there is -- or is there any other heavier CapEx years that we should expect?

A: I'd say we're caught up for the most part in terms of deferred CapEx at this point.

Q: And then just lastly, I know you mentioned -- and I believe I heard this correctly, the new debt financings of $300 million to $350 million in 3Q. Is that going to be new secured debt on SHOP assets? Or how should we think about how that potential secured financing could come in?

A: Yes. We've been working on this for a bit of time now. We have a couple of different options at play. Some is secured financing or unsecured in the form of a bond or more traditional type financing. As of now, we're not expecting it to be on SHOP communities, but we expect to report more in the coming months on that.